Daily US Opening News And Market Re-Cap: August 23

Dovish FOMC minutes and the weakest Chinese HSBC manufacturing PMI since November 2011 prompted expectations of further central bank action in the near-term

European manufacturing and service PMI's were mixed with forecast beating numbers out of France negated by weakness seen in the German service sector

Spanish & Italian yields continue to fluctuate with the Spanish/German 10yr government bond yield spread back at last Friday's 500BPS level

Market Re-Cap

Reports that the ECB is discussing a new variation for sovereign bond purchases involving secret caps for interest rates failed to support peripheral EU bonds and instead provided market participants with an opportunity to book profits following recent strong gains. As a result, 10y peripheral bonds with respect to the benchmark German Bund are wider by around 12bps, with the shorter dated 2y bonds wider by around 15bps. This underperformance by peripheral EU assets is also evident in the stock market, where the IBEX and the Italian FTSE-MIB failed to match performance of the core indices today.

The latest PMI data from the Eurozone, as well as China overnight underpinned the need for more simulative measures either from respective central banks or the government. While the PBOC continues to refrain from more easing, the release of the FOMC minutes last night revealed the members favoured easing soon if no growth doesn’t pick up.

Looking elsewhere, the EUR continued to benefit from the short-squeeze, however offers from Asian sovereign names at 1.2570 prevented the pair from making a test on the touted 1.2600 option barrier. In spite of somewhat hawkish comments from BoE’s Weale, as well as less than impressive data from the Eurozone, GBP/USD is seen little changed as we enter the North American cross over.

China should further widen the trading band for USD/CNY in order to boost the country's exports, according to Chinese press. The

USD/CNY trading band currently stands at +/- 1.0% from the daily PBOC fix, which stood at 6.3316 overnight.

US Headlines

Fed's Evans said the US economic performance is "unsatisfactory", and there is a need to be wary of the US fiscal cliff, but inflationary pressures are modest. The Fed official said more accommodation is not only needed in the US to satisfy the dual mandate, but also in China and worldwide, as accommodation is the "best defence against unexpected shocks".

Fed's Bullard is today's quest speaker on CNBC and has been downplaying the dovish interpretation of yesterday's minutes saying that conditions in the US economy and financial markets are better now than a year ago. Bullard also said he is not sure what data would warrant big action and that they are not going to react directly to the stock market.

EU & UK Headlines

Die Welt reported that the ECB is discussing a new variation for sovereign bond purchases involving secret caps for interest rates, citing unnamed sources. The sources also stressed that no decisions have been made as yet. The piece said many central bankers prefer this variation over official caps and adds that a group of experts are working on the idea, and are expected to make the recommendations shortly.

German Finance Minister Schaeuble said 'more time is not a solution' with regards to Greece's request for an extension for reforms, adding that more time could also mean more money,. and the Eurozone has already come to the limits of what is economically viable. Separately EU's Juncker said that Greece faces its last chance and that he does not support a third aid package for the country.

BoE's Martin Weale made some hawkish comments this morning as he said lowering short term interest rates to 0% or 0.25% could have perverse effects, such as weakening the financial situations of some banks by reducing their income on deposits. He added that at this stage, it is not necessary to increase the amount of asset purchases, which is interesting given the growing expectations of more QE ahead.

European equity markets opened higher this morning underpinned by expectations of central bank action following the Fed minutes and weak Chinese data overnight. However, a combination of mixed European manufacturing and service data weighed on sentiment and despite the EUR currency holding onto the mornings gains the stock market has drifted lower with particular volatility observed in the IBEX and FTSE MIB as Spanish and Italian yields continue to fluctuate.

In individual stock moves Rhoen Klinikum in Germany has seen the biggest percentage gain (+6.4%) after reports that Fresenius has informed the financial watchdog of its interest for a new offer. On the other end of the scale IMI PLC of the FTSE 100 has declined over 4% having posted a 1H net profit below analysts expectations pre-market.

FX

EUR continued to benefit from the short-squeeze, however offers from Asian sovereign names at 1.2570 prevented the pair from making a test on the touted 1.2600 option barrier. In spite of somewhat hawkish comments from BoE’s Weale, as well as less than impressive data from the Eurozone. The USD index firmed some 0.1% on the back of the initial Fed Bullard comments as he down played somewhat the dovish tone of the Fed minutes but although action seems likely timing is still uncertain. There are a couple of option expiries to note ahead of the 10am NY cut (1500BST) for EUR/USD at 1.2550 and in AUD/USD at 1.0450/1.0500.

Commodities

WTI crude futures were trading at their highest levels since mid-May at USD 98.29 earlier in the session, buoyed by yesterday's larger than expected draw down in US crude stockpiles amid a drop in crude imports, the more dovish FOMC minutes and amid speculation that the People's Bank of China may now take action following the weaker than expected Chinese Manufacturing PMI overnight. However, the futures have pulled off there highs heading into the NYMEX pit open following a bout of mixed Eurozone PMIs and as investors take profits.

Looking ahead we have the release of the EIA natural gas storage change expected reading at 40BCF from 24BCF in the prior week.